In the months leading up to the Persian Gulf War, the last time oil prices got as high as now, a number of players took elaborate steps to bring oil markets back to normal. It could be harder this time.
Though prices soared after Iraq invaded Kuwait and the world embargoed oil from both nations, prices had begun declining even before U.S. bombs rained on Iraq months later. Then they plummeted, averting a full-blown oil shock.
Relief came because independent decisionmakers from Riyadh to Washington executed a complex ballet learned over decades to deal with supply crises. The United States released emergency stocks, pumped more crude oil in Alaska and flooded the airwaves with conservation messages. Producers with unused capacity, such as Saudi Arabia and Iran, opened their spigots, loading tankers with extra oil to offset what was lost.
Many analysts are predicting prices will again fall once shooting starts. But this time, conditions are far different. The whole supply chain _ producers, shippers and consumers _ is groaning under unprecedented strain.
Most critical is that producers won't be able to pump much more crude oil. When Iraq invaded Kuwait in August 1990, suppliers had large unused capacity that let them pump more right away. Saudi Arabia alone was able to make up for 60 percent of the lost Iraqi and Kuwaiti crude, which it did before the bombs started falling in January 1991. This time, almost everyone is pumping flat-out already.
Oil chiefs from the Organization of Petroleum Exporting Countries, meeting Tuesday in Vienna, agreed to stick with their current crude oil production quotas but pledged to boost output in the future to keep supplies flowing in case of any serious disruption. Iran Monday opposed lifting official limits on output, saying it would imply political support for the Bush administration, but its stance isn't expected to keep the cartel's 11 members from pumping all-out. Most are producing well in excess of their quotas and to their capacity limits, so they can't do much more.
The industry faces other squeezes that didn't exist in 1990. A strike has hobbled output in the No. 5 exporter, Venezuela. Refiners in the United States, the largest consuming nation, have whittled their cushion of oil inventories to record lows, partly as a cost strategy. In Japan, a shutdown of nuclear-power plants has forced the import of large amounts of extra oil for electricity. On top of all this, the year's cold U.S. weather contrasts with the milder winter of 1990 and has further strained supplies.
At the end of this stretched chain, consumers from Tennessee to Tokyo are vulnerable to even modest missteps that could trip up the oil industry's delicate dance. "If a couple of suppliers get into trouble, there's a problem," Lee Raymond, chief executive of Exxon Mobil Corp., said last week.
Keeping the oil industry choreographed is crucial, because every recent recession has come on the heels of an oil-price jump, or been exacerbated by one. Today's price runup comes as the world economy is struggling.
Oil markets are signaling that they expect a closer call than in the last Iraq crisis 12 years ago. Back then, prices peaked at $41.15 a barrel just after Iraq seized Kuwait and the world embargoed oil from both countries. This time, oil has come to within a penny of the $40-a-barrel mark, before any loss of Mideast oil. Average prices in February were 72 percent higher than a year ago. Crude for April delivery settled Monday at $37.27 a barrel, down 51 cents.
Many industry officials expect prices will swiftly return to about $25 a barrel if a war is brief. But even if there isn't a lasting oil shock, high prices could dent the U.S. economy.
The industry retains some lines of defense. OPEC says it is ready to pump a modest additional amount if war breaks out, though industry experts question how much more is possible.
U.S., European and Asian governments can release emergency oil stocks. The return of warm spring weather is expected to ease pressure by reducing demand. And it's possible that further recovery in Venezuela could ease concerns. Venezuela is pumping about 1.7-million barrels a day, half its prestrike production, after having all but ceased exports in December.
Part of the challenge is that the world consumes more oil than a decade ago: 77-million barrels a day last year, up about 10-million barrels, or 15 percent, from 1990. Despite attempts by governments in oil-consuming nations to cut dependence on the volatile Middle East, the region still contributes 44 percent of global exports.
The biggest problem is that the industry has far less margin of error than in 1990-91. Consider the feat suppliers orchestrated then.
The ban on Iraq's and Kuwait's crude oil deprived the world of 4.5-million barrels a day in August 1990. But the OPEC cartel had 5-million barrels of spare capacity, equal to 7.5 percent of world output. The Saudis rushed to the market 3-million more barrels daily. ARCO, now part of BP PLC, ramped up its Alaska production by 260,000 barrels a day. By December 1990, the shortage had been more than covered, with a small cushion of about 1 percent of supply.
Today, global spare capacity is only about 2 percent _ and that's before any war cuts Mideast supplies. Iraq is still exporting 2-million barrels a day. In the first few hours after fighting starts, Iraq is expected to shut off exports, eliminating about 2.6 percent of global supply. Should Saddam Hussein torch his fields to slow invaders, Iraqi oil wouldn't be available for months or years.
Fighting might embroil Kuwaiti fields or export facilities in the northern Persian Gulf, temporarily taking out another 3 percent.
Suppliers outside OPEC, such as Russia and Norway, are exporting all they can, as they typically do. Even if OPEC opens spigots wide, it may be unable to fully replace Iraqi output. Only Saudi Arabia and the United Arab Emirates can immediately pump significantly more _ at most a total of 700,000 extra barrels a day.
Saudi officials put their daily output at 8-million barrels, but many oil experts think it's closer to 9-million. The Saudis can add about 500,000 barrels a day immediately and perhaps 1-million more in a few months.
Others in OPEC are hard-pressed just to keep output where it is. Take Kuwait, the Mideast's fifth-largest producer. Kuwaiti officials say they are pumping close to 2.2-million barrels a day and hope to reach about 2.4-million in the next week, though some analysts are dubious.
Early last year at Ar Rawdatain field, near the Iraqi border, an explosion and fire tore through a gathering center for freshly pumped crude oil and gutted a control room and pumping station. It knocked out 600,000 barrels of Kuwaiti production a day, of which somewhere between 50,000 and 250,000 are still out.
As U.S. soldiers streamed into Kuwait's northern desert, the country shut two fields along its border with Iraq, sending workers and drilling rigs to safer fields in the south and eliminating up to 100,000 barrels a day of output. More recently, Kuwait warned it may have to close other wells if war erupts, potentially depriving markets of up to a third of Kuwait's overall production. Workers are pumping flat-out in big southern fields such as Burgan, but continuing to do so could eventually damage wells.
The very presence of Allied forces eats into Kuwaiti exports, as the United States buys fuel to supply its thousands of troops there. Such pressures drain inventories in the West, marking another contrast with 1990. Adequate stores of oil around the world cushioned the blow of the Gulf War. Inventories kept by refiners and other big users in the United States and Europe were 25 percent greater in 1990 than today.
Corporations' inventories of oil and oil products in industrial countries were enough for 52 days of use this January, compared with 65 days before Iraq invaded Kuwait in 1990, according to the Centre for Global Energy Studies.
Producers scrambling to build inventories must fight brushfires today that they didn't face in 1990 or '91. The Venezuela strike decimated U.S. stocks. In the week ended Feb. 28, U.S. crude inventories were 11.5 percent below the five-year average for February, and the lowest for any month in 27 years.
In Japan, Tokyo Electric Power Co. has shut 14 of its 17 nuclear-power plants out of safety concerns. It and other Japanese utilities have been buying lots more oil. The International Energy Agency, a Paris watchdog for consumer countries, estimates that in December, Japanese demand for oil for power plants rose 370,000 barrels a day, equal to more than half the output of Qatar.
The market is also having trouble getting the right kind of crude to refineries, most of which are configured to process specific kinds of oil. One in the Houston area halved production in December to 130,000 barrels a day because it lacked Venezuelan supplies of a heavy grade of crude. The market's fate could come down to a last line of defense: the officials who control government stockpiles of oil. Twenty-six leading industrial countries hold stocks equal to about 114 days of imports. Of this, 90 days' worth of imports are pledged to the International Energy Agency, which is in charge of releasing oil in emergencies.
The IEA controls 4-billion barrels of oil, some of it stashed in salt caverns near the North Sea coast near Hamburg, Germany, and along the Gulf Coast in Louisiana.
In an emergency, the IEA could release as much as 12-million barrels a day, more than the combined output of Saudi Arabia and Iran. Claude Mandil, the French technocrat who heads the agency, says he could act "within hours" if shooting starts. But the process quickly can become complicated.
The agency took about six months to act after Iraq invaded Kuwait in August 1990. By the time it agreed in January 1991 to release stockpiled oil, it wasn't needed.
The United States and others can unilaterally release stockpiled oil beyond the barrels they have pledged to the IEA. The United States has 30 days' worth of oil it could put on the market by tapping its Strategic Petroleum Reserve, which can pump out as much as 4.3-million barrels a day, about twice Iraq's recent exports.
The question is whether the United States would release any in time to prevent a damaging price shock.
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